AT&T's Troubling Plan to Change HBO
 
The telecom giant, which just acquired Time Warner, is seeking to drastically
change the premium-cable channel in order to compete with the likes of Netflix.
David Sims
Jul 9, 2018
 
HBO CEO Richard Plepler talks about HBO Now for Apple TV during an Apple event
in San Francisco.
AP / Eric Risberg
 
This past February, HBO added the most U.S. subscribers in its history,
boosting its user base by 11 percent (the company has some 142 million global
subscribers). The steady growth of the premium-cable and streaming service to
$6.3 billion in revenue last year helped power its parent company, Time
Warner, to $31.3 billion in revenue-a 7-percent overall jump despite dips in
other divisions. Since the telecom giant AT&T began its bid in 2016 to acquire
Time Warner, it came to be widely understood that HBO was one of the most
prized parts of the deal, which became official in June after a lengthy legal
battle.
 
The channel's stature is what makes it baffling to learn of reports that the
new Warner Media chief executive John Stankey recently lectured HBO employees
on the hard times ahead. In the eyes of Stankey, an AT&T veteran, HBO is
apparently too small, too nimble, and too boutique-ill-fitted for a media
world that's all about size. During a closed-door June 19 conversation with
some 150 HBO staff, "Stankey never uttered the word `Netflix,' but he did
suggest that HBO would have to become more like a streaming giant to thrive in
the new media landscape," reported The New York Times. That means aggressive
expansion, with a flood of new shows, to give HBO the kind of massive library
Netflix is currently building.
 
Netflix is a production company of peerless scale when it comes to TV. It's
projected to spend $12 to $13 billion on original programming in 2018;
meanwhile, HBO spent $2.5 billion on its shows in 2017. Netflix's strategy is
to overwhelm, pumping out fresh content at its subscribers and relying less
and less on licensed material it doesn't own. HBO has always had more of a
"prestige" bent, taking a very long time to develop its shows and launching
them with extreme fanfare, with an eye toward awards. But Stankey seems to
view that deliberate pace as a result of laziness, and his desire to upend the
network's careful approach to putting out new shows (it only makes a handful
per season) could mean the end of HBO as we know it.
 
"It's going to be a tough year," Stankey said the June meeting, according to a
recording the Times obtained. "It's going to be a lot of work to alter and
change direction a little bit." Expanding HBO's viewer base would require more
programming, released at a faster pace, well beyond the channel's rotating
Sunday night lineup that makes up the core of its original shows. "I want more
hours of engagement ... You get more data and information about a customer
that then allows you to do things like monetize through alternate models of
advertising as well as subscriptions, which I think is very important to play
in tomorrow's world," Stankey said.
 
HBO's current profit model is simple but effective. People pay a fee
(something like $15 a month) to subscribe; HBO uses that money to license
movies and produce TV for subscribers to watch. Because of the company's
longtime reputation for high-quality, Emmy-winning shows like Game of Thrones
and Big Little Lies, plenty of people subscribe, and HBO makes a lot of money.
 
Netflix's business approach, again, is about scale and is underwritten by
investors. The company has focused on getting more worldwide users and hiking
its subscription fee to increase revenues. But producing more original shows
means Netflix burns through more money-a March 2017 report found Netflix had a
negative free cash flow of $2.1 billion. A few months later, the company said
in a letter to shareholders that it would remain in the negative for years,
but that the investment would crucially help the company spread across the
globe.
 
As he assumes control at Warner Media, Stankey is correct in identifying HBO
as the company's only obvious Netflix rival. But the kind of staggering growth
he wants will necessarily disrupt the calculated approach to development that
has distinguished HBO for two decades. Due in part to the sheer quantity of
its output, Netflix has managed to greenlight some critical hits. But it has
not yet won an Emmy for best drama, comedy, or miniseries, while HBO still
rules the roost at awards season. The premium-cable network has put out shows
like The Sopranos, The Wire, Sex and the City, Deadwood, Six Feet Under, and
Veep that helped define the so-called "Golden Age of Television"-which is now
receding in the wake of Netflix's content deluge. In response, Stankey wants
HBO to become another titan in this era of streaming behemoths.
 
In this age, as Stankey made clear, "hours of engagement" are what matter
most. Executives have long factored viewing data extracted from subscribers
into their programming decisions, but online services can mine our viewing
preferences much more minutely. The more data, the easier it is to understand
what people want-at least that's been Netflix's guiding principle as it makes
hits like House of Cards and Stranger Things, which are calibrated to play on
audience nostalgia. But the idea that numbers alone will drive good or popular
art is ludicrous; Netflix has made plenty of shows that haven't hit the mark
with audiences, like any other network.
 
Stankey isn't the only executive worried about the rise of Netflix. Disney is
preparing to launch its own streaming service, and its proposed acquisition of
Fox would help fill out its library of properties. The future of media will
certainly revolve around subscription-based streaming services. But Netflix is
turning into a kind of broadcast-TV network: a big umbrella for lots of
different kinds of programming. Founded more than 45 years ago, HBO has long
been a challenge to broadcast television, staking its reputation on offering
something different. As the slogan went, it's not TV, it's HBO. Now, Stankey
wants to make it TV.
 
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    Derek Thompson
 
 
Regards,
 
Roger

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